Why We Share Homes, Cars, and Clothing With Strangers

Women used to think of Rent the Runway for parties. It was a cheap way to have an expensive dress for one night. You just went to their website, chose the dress, got it several days later, wore it, and mailed it back.

Now you can see below that the firm rents much more than party dresses. Their website offers you an entire wardrobe. Through their $89 plan, you can get up to four dresses a month. Each one arrives dry-cleaned, in a garment bag with a prepaid postage label. Purses and coats are also a possibility:

Hoping to lure shoppers away from Target and Zara, Rent the Runway says you can buy less and wear more. As they describe it, women just need to own some basic wardrobe items. The rest they rent.

For the $1,068 that a basic RTR plan would cost, a shopper could buy many fewer dresses at a retailer:

Our Bottom Line: Transaction Costs

Whether its Airbnb, BlaBlaCar, or Rent the Runway, the way to think of the sharing economy is through transaction costs. The sharing economy only works when transaction costs are so low that sharing rather than buying makes sense.

For starters, please think of a transaction cost as what you need to do for a purchase, to get a job, or to accomplish some other task. Beyond the dollars you spend, the transaction costs include hassles like standing in line, filling in complicated forms, and waiting for a person to pick up your phone call.

In the sharing economy, we could identify three categories of transaction costs:

Finding the shared items.

Transferring the shared items.

Trust.

Returning to RTR, they nailed it. They made the search and transfer easy. And the trust, ranging from cleanliness to dependability seems to be built into the “contract.”

So, if you are wondering why you have these relationships with strangers through the sharing economy, it is probably because of the low transaction costs.

My sources and more: After hearing about transaction costs in the sharing economy on Econtalk, I realized that Rent the Runway was the perfect example. Among the countless articles on Rent the Runway, the Wall Street Journal had a good update. However, if you go to just one link, do listen to this Jenn Hyman interview from How I Built This.

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Elaine Schwartz has spent her career sharing the interesting side of economics. At the Kent Place School in Summit, NJ, she has been honored through an Endowed Chair in Economics and the History Department chairmanship. At the same time, she developed curricula and wrote several books including Understanding Our Economy (originally published by Addison Wesley as Economics Our American Economy) and Econ 101 ½ (Avon Books/Harper Collins). Elaine has also written in the Encyclopedia of New Jersey (Rutgers University Press) and was a featured teacher in the Annenberg/CPB video project “The Economics Classroom.” Beyond the classroom, she has presented Econ 101 ½ talks and led
workshops for the Foundation for Teaching Economics, the National Council on Economic Education and for the Concord Coalition.